House Committee Aproves FHA "Short Pay" Loans
A key committee in the House of Representatives late Thursday passed legislation that would make up to $300 billion in federally insured mortgages available to borrowers facing foreclosure.
The bill, H.R. 5830, the Federal Housing Administration (FHA) Housing and Homeowner Retention Act was passed out of the House Financial Services Committee and on to the full house by a bipartisan vote of 46 to 21.
Under the principle provision in the bill, the FHA will guarantee a new loan to a troubled borrower if the existing lender will agree to accept a short payment (i.e. less than the outstanding balance of the loan) in full payment of the old loan. The new loan would be limited to no more than 90 percent of the property's value and must have terms that the borrower can reasonably be expected to pay. When the borrower sells or refinances the home the borrower will pay from any profits either an exit fee equal to 3 percent of the original loan amount or a declining percentage of any net proceeds attributable to home appreciation (from 100 percent in year one to 50 percent in years four and beyond,) whichever is larger. The government, therefore, would only be at risk if the borrower defaults on the new loan in which case he would lose the house.
Supporters of the law say that it would allow families to stay in their homes, protect neighborhoods, and help stabilize the housing market.
House Financial Services Committee Chairman Barney Frank (D-MA) waved a bit of a stick in the face of loan servicers, saying that "Servicers should put a pause in some foreclosures until they can wait to see exact details of this as it moves forward. If after this we continue to get very little participation by services, I can guarantee you that the servicer industry will look very different a year from now than they do today. If after everything we do in this cooperative way falls short, then you are going to see legislation that puts some very real restrictions on the role of servicers and give many more rights to the borrowers."
Supporters estimated that the bill might help as many as 1.5 million borrowers who are in trouble with their existing mortgages.
Committee passage of the bill almost assures its passage by the entire House, but the Senate is still wrestling with their version of a housing bill. Both House and Senate earlier passed very different bills last month and must resolve their differences before passing the bill on to the White House for President Bush's signature.
The President, however, has proposed his own, very specific legislation that would update the operations of the FHA, tighten rules and control of the two government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and to let state and local housing authorities to use tax-exempt bonds to refinance bad loans.
The administration's current efforts to help homeowners facing foreclosure is called FHA Secure and, according to The New York Times, has thus far assisted only about 2,000 homeowners who were "clearly behind in repaying their loans." We will look at this program and its progress next week.
The Senate is unlikely to take up their version of legislation until at least late next week, and many Republicans who had previously been receptive to the bill appear to be falling into line with the President's views on the measure.
HR 5830 as passed yesterday also calls for the Federal Reserve Board to conduct a study on the need for an auction or bulk refinancing mechanism for loan packages to facilitate moving more liquidity into the credit market.
The entire bill has a "sunset provision" set for two years after passage with flexibility for additional 6 month extensions. The entire program will expire in a maximum of four years.